All the way back in February of this year, Apple’s iPhone business alone surpassed the size of Microsoft’s entire business, reaching nearly $25-billion in annual revenue versus Microsoft’s $20-billion. Read more

“Although analyst estimates may need to be trimmed, we don’t think the story is over,” said Steven Milunovich, a New-York based analyst at UBS. “Apple is driven to make beautiful products. Whether it is an iTV, wearable computers, or another new product category, we have faith that innovation is not dead.”

He reduced his earnings estimates for 2013 and 2014 as supply chain checks suggest the iPhone 5 build rate is falling to 25 million units for the second quarter (ending in March) of fiscal 2013.

Apple shares were down 4.4%, or US$23.47, to US$506.22 at 3:09 p.m. ET in Nasdaq trading. The stock has declined more than 25% in the past three months, after peaking above US$700 in September 2012.

The consensus target price for Apple shares among analysts is US$747.36, according to Bloomberg.

Related

Mr. Milunovich also noted that some Chinese sources don’t expect the iPhone 5 to do as well as the iPhone 4S. Apple’s newest smartphone was released in China on Friday.

The analyst believes the iPad mini may be cannibalizing the larger iPad and thinks his previous growth estimates look aggressive given the weak European economy and tougher handset competition.

However, Mr. Milunovich said China Mobile could start selling iPhones in the fiscal first quarter, so a summer iPhone 5 that accommodates the country’s largest carrier’s TD-SCDMA network and includes fingerprint recognition is possible.

China Mobile serves nearly 85% of China’s high-end handset market. Apple has discussed a deal with the telecom giant for several years.

Jefferies analyst Peter Misek trimmed his iPhone estimates for the first quarter of calendar 2013 as major component suppliers have seen significant order reductions for that period.

“Apple component suppliers have received order cuts in the last 24-48 hours, but we believe assembly orders remain unchanged,” the analyst said.

While he believes this is primarily due to fourth quarter component over-builds and excess inventory, Mr. Misek reduced his first quarter iPhone estimate to 48 million from 52 million.

“We do not see a demand issue as there is still no iPhone 5 inventory at retail. Also, we have not detected any finished goods inventory at suppliers,” he said. “We would note that the iPhone 5 China launch has been surprisingly muted but are unsure how much weather (snow) or the required pre-ordering (to prevent riots) are factors.”

The analyst also lowered his gross margin forecast to 40% from 42% due to assembly execution issues that are taking longer-than-expected to resolve.

Mr. Misek cut his price target on Apple to US$800 from US$900 on Monday, as he thinks fiscal 2014 could bring negative margin leverage, which will likely lead to multiple compression.

The analyst noted that very early iPhone build plans for calendar 2014 indicate a deceleration to roughly 20%, from growth in the 40-50% range in 2013.

“We believe that much of this well be due to the saturation of developed markets,” he said on Monday, adding that the future for the industry and demographic trends point to lower priced phones.

While a low-cost iPhone in the $200 to $250 price range has not been approved, Mr. Misek thinks it could launch in June or July.

His analysis indicates that while Apple would gain unit share, revenues and EPS would remain largely unchanged, and gross margins would fall.

“The stock has been a tug of war between low valuation and peaking growth and margins,” Mr. Milunovich at UBS said, pegging an upside case for the stock at US$800 and a downside scenario at S475. “Earnings momentum should turn positive and help the stock in 2013.”

His bullish case would be driven by increased demand and market share gains for the iPhone 5, a better-than-expected rebound in gross profits, and the introduction of new products and categories.

Mr. Milunovich suggested this could increase earnings by 15-20% and would produce some multiple expansion, perhaps above 13x on a P/E basis.

“Our sense is that Apple and China Mobile could partner on the iPhone toward the end of 2013,” he said, noting that this represents 13-17 million units in potential demand annually. “Should a deal come sooner, Apple would have a better opportunity in building a sound foothold while warding off share gains from incumbent high-end players – Samsung, HTC, and Nokia.”

The stock has been a tug of war between low valuation and peaking growth and margins

Mr. Milunovich’s bearish scenario would likely mean Apple’s negotiations with China Mobile stall or produce unfavourable terms, including a lack of subsidy support or promotion.

Other downside scenarios could include market share losses to Android phones and tablets, a strong debut for Windows 8 mobile devices, a prolonged cycle of disappointing profits, and new product launches that are not seen to be innovative.

“Given Apple’s loyal base, we think a less inspiring new product cycle would not be immediately reflected in the company’s results this year, though we would expect continued pressure on the stock’s multiple,” the analyst said.

“We think investors would care to see Apple go on the offensive by realigning the timing of its new product roll-outs closer to those of its primary competitors. Investors should also want to see the company become more aggressive in its marketing.”

Investing Videos

Promoted by iShares by Blackrock

Active Investor was produced by Postmedia's advertising department in collaboration with iShares by BlackRock to promote awareness of this topic for commercial purposes. Postmedia's editorial departments had no involvement in the creation of this content.